How Franchising Works

Part of the franchise agreement will cover what happens at the end of the term. Many franchise systems offer renewal options for the franchisee. In some cases, however, the franchise company will try to deny the renewal. There are 16 states that have franchise relationship laws in place. If the franchisor tries to deny renewal in one of these states, it may be violating state law. The focus of the laws in these 16 states is on regulation of the renewal and termination of franchises. Nearly all franchise statutes that address renewal issues require specific franchisee misconduct for a franchisor to be able to deny renewal. There are, however, some states (California and Wisconsin) that permit a franchise to deny renewal for economic reasons, such as a company-wide decision to discontinue franchising.

The conditions for any of these non-renewal situations would be a part of the original franchise agreement.

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Transfer of Ownership

Transferring ownership of a franchise may also be more difficult than you might think. There may be provisions and restrictions in the franchise agreement that prohibit it, or at least restrict it. It is a difficult situation because the franchisee owns the assets of the business, but the franchisor owns the brand and trademark.

Ownership transfer elements of franchise agreements often include these types of statements:

The franchisor gets the right to approve transfer.

The franchisee must execute a release (unless limited by state law).

The franchisor gets final approval of the prospective franchisee's qualifications.

There are limitations on transfers to competitors (usually upheld by courts).

The franchisor gets the right of first refusal under the same terms as the prospective franchisee.

The franchisee must have no outstanding fees owed to the franchisor.

Three of the 16 states with franchise relationship laws (Iowa, Michigan, and Wisconsin) also have provisions that directly relate to franchise transfers.

For more information on franchising and related topics, check out the links on the next page.